Atlantic article on the "death spiral" of biglaw Forum

[Gail]

http://www.theatlantic.com/business/arc ... ms/256124/

This is because law firms, like banks, work based on confidence. When individual partners are satisfied that things are operating smoothly, and are happy with their pay, the organization functions. When partners leave, even if it's for an unjustifiably large paycheck elsewhere, it cuts into the firm's revenues and its confidence. The more partners depart, the worse the damage. And, in a severe situation, it can turn into a mass exodus -- or a run on the bank. At that point, things can quickly disintegrate. If a law firm's partner count drops too low, lenders will cut off their lines of credit, effectively pulling the plug on their operations.

So rather than finding ways to innovate and improve profits, much of the legal world has turned to cannibalizing itself. Dewey may be the victim today, but there'll probably be others tomorrow. This is what happens when an industry can't see past the good times, then gets sacked by the bad.

An ominous quote.


I realize we all pretty much knew this for the most part already, but the article has some cool charts for visual effect.

[sunynp]

What do you think? I know someone posted a link to the citi report stats (it might have been me) if I can find that thread I will link it; this was posted yesterday but I didn't see it here. Sorry if I missed it.

http://www.theatlantic.com/business/arc ... ms/256124/

This is an important part:

When the recession hit, these slow and flabby firms were broadsided. Business dried up. Clients balked at the annual rate hikes, and many started demanding discounts. Most firms maintained profits by laying off associates and staff (that's reflected in the graph below as the decrease in expenses).

in other words, they resorted to temporary pain relief -- taking aspirin to treat a broken leg. But the problems that began in the recession were not a momentary blip. Rather, they seem to have been the beginning of a long term shift, where companies are simply not willing to spend as much on lawyers. Legal outsourcing firms, the use of inexpensive contract attorneys, the decision by companies to bring more work in-house, and demands for cheaper rates have all put permanent pressure on profits. The march of improved information technology will only slim margins further.

But also note:

You might notice that a few firms still appear to be producing stellar results. In fact, they seem to be doing better than ever. And it's true -- a few are. These are the metaphorical 1 percent of the legal industry, the elite firms based mostly in New York that have been able to maintain their performance by focusing on the most expensive, sophisticated work. For everyone else, the wrenching changes that followed the recession have disrupted their business.

Here is the business week article linked to in the above:
http://www.businessweek.com/articles/20 ... shoe-blues

Yet even these approaches can’t fix the fundamental challenge facing the legal profession: At all levels, the industry suffers from excess labor.

Also:

The recent economic downturn accelerated a trend already under way, says Seyfarth Shaw’s Poor: “Law firms whose business model remains what it has been for more than 30 years—namely, every year we just raise our rates and expect clients to pay up—well, those law firms will find the old ways aren’t sustainable.”

[09042014]

PPP is still growing. I don't see how this is a death spiral for all of big law. I think some firms became unsustainably large during the boom years and will stagnate, shrink or collapse.

The article basically says firms aren't growing at the frantic pace of 04-07. But those times were abnormal.

[sunynp]

PPP is still growing. I don't see how this is a death spiral for all of big law. I think some firms became unsustainably large during the boom years and will stagnate, shrink or collapse.

The article basically says firms aren't growing at the frantic pace of 04-07. But those times were abnormal.

I think the article is saying that the top firms will be ok, but that a lot of biglaw will be in trouble, disappearing. Also, margins are going to get lower. I don't know how much of PPP going up the past couple of years has been based on cost-cutting.

Mostly, I get a sense of unease from these articles. I think there are fundamental problems with the biglaw model and biglaw hiring. But it might take a while to shake out.

[sunynp]

http://www.top-law-schools.com/forums/v ... 3&t=183219

Looks like we had the same thought! I didn't copy the graph though.

[Guchster]

http://www.top-law-schools.com/forums/v ... 3&t=183219

Looks like we had the same thought! I didn't copy the graph though.

Ask the mods to get rid of this thread. the other one has marginally more posts. There's no need for two.

[bld17]

So does anyone have a conjecture about which firms are "safe" and which firms to avoide?

[Renzo]

PPP is still growing. I don't see how this is a death spiral for all of big law. I think some firms became unsustainably large during the boom years and will stagnate, shrink or collapse.

The article basically says firms aren't growing at the frantic pace of 04-07. But those times were abnormal.

The big firms are cannibalizing themselves to grow PPP, and it is a death spiral, but it has nothing to do with the late 2000's recession.

Firm partners have basically decided to pull the career ladder up behind them. They are unwilling to take smaller matters or matters at lower billing rates that could be used to profitably train junior attorneys; and fewer and fewer clients are willing to pay extortionate rates for juniors in order to subsidize their training on big matters. Essentially, biglaw as a species is getting fat by eating its own young--which works great in the short run, and guarantees extinction in the long run.

My bet is that over the next 10 years, we will see more and more smallish boutique-like firms started by superstar biglaw partners gone indie. These firms will be essentially single specialty, with marquee names that attract clients willing to pay $1000/hr, but small enough to take little matters that can profitably be run with only cursory supervision by the big guns (and allow the juniors the experience they need to grow into big guns someday). There will still be a need for large global firms, but there is going to be a race to the bottom, as clients look for low prices for commodity work while sending their tricky stuff to one of the specialty firms.

[cloudhidden]

As a 0L I am confused by this article. Does this suggest that there will eventually only be enough big law spots for LR kids at T14,or am I reading way too far into it?

[bk1]

http://www.top-law-schools.com/forums/v ... 3&t=183219

Looks like we had the same thought! I didn't copy the graph though.

Ask the mods to get rid of this thread. the other one has marginally more posts. There's no need for two.

Merged.

[nygrrrl]

http://www.top-law-schools.com/forums/v ... 3&t=183219

Looks like we had the same thought! I didn't copy the graph though.

Ask the mods to get rid of this thread. the other one has marginally more posts. There's no need for two.

Merged.

Thank you!

[Indifferent]

So, revenue remained virtually constant during the worst recession in recent history.

Sound teh death knell.

[thesealocust]

As a 0L I am confused by this article. Does this suggest that there will eventually only be enough big law spots for LR kids at T14,or am I reading way too far into it?

Definitely reading into it too far. There are maybe a total of ~500 on LR each year at the top schools, not all of whom even want biglaw. Even in the crash there were still probably 3,000-5,000 total entry level big law jobs. Even if many disappear, it will almost certainly never be that restricted.

There are also signs pointing in the opposite direction. Outsourcing and e-discovery and shit all represented huge changes in litigation, but there's some push-back now (i.e. things were done cheaply, then went wrong, then there were law suits).

So does anyone have a conjecture about which firms are "safe" and which firms to avoid?

The firms with the best reputations in each market are probably still quite "safe" - it's hard to draw fine lines though. Latham NY once had an amazing reputation, but a lot of it was either built on thing unrelated to firm health (i.e. "culture" or "niceness" of the lawyers) or something that proved to be unsustainable (i.e. expanding hard into structured finance right before it dried up completely in the recession).

One thing to realize about the 'race to the top' in the legal industry is that for the most complex and/or most critical work, lawyers are worth every penny of their occasionally 4-figure hourly billing rate. BP isn't going to balk at the staggering legal bills it gets from Kirkland, because Kirkland is the shit and their lawyers are basically the thin sleep-deprived line between BP and a bazillion angry gulf coast residents / businesses with a bazillion angry plaintiffs lawyers. The next major politician to get caught up in a criminal investigation is going to hire W&C, because their life will pretty much literally be on the line. If a company is engaging in make-or-break M&A transactions, they'll be smiling as they write out a novelty-sized check (so they can fit all the zeros) to Wachtell.

Having said that, conflicts and the clock mean there's never just one go-to firm for such matters, so for every legal practice and every market there will probably always be a small handful of firms that split up the best work and spend all of their time doing deals with or litigating against one another.

[Gail]

Sound teh death knell.

Revenue fell during the recession.

If revenue falls, profits definitely fall. If profits fall, partners are not happy. If partners are not happy, they begin to play pin the tail on the junior associates. If they play pin the tail on the junior associates, the junior associates begin to think that they are actually piggies. If junior associates begin to think that they are actually piggies, they mess their trousers. And if they mess their trousers they have to give back their Harvard JD and reattend law school at Cooley.

Don't give back your JD and reattend law school at Cooley. Make your partners happy by engaging in massive insider trading, thereby increasing the firm's billable hours.

[cloudhidden]

There are also signs pointing in the opposite direction. Outsourcing and e-discovery and shit all represented huge changes in litigation, but there's some push-back now (i.e. things were done cheaply, then went wrong, then there were law suits).

This is why the article threw me for such a loop. I tried to recast the article in light of a would-be OCI hopeful in the coming years. The word has been that hiring has been up in the short term. But this article belies that temporary recovery. The question remains whether we are really headed for a grand-scale contraction of big law in the coming years, or is this article just overly cautionary?

[Indifferent]

Edit: lawl, sorry, didn't read anything else after that.

[sunynp]

Yes, revenue fell during the recession so the firms no-offered, fired and deferred associates. The partners will always cut associates to keep their revenue up. I know there are threads here where people are wondering how much they will have to work, but the real problem starts when you aren't getting work, when the firm isn't busy and when people are living normal hours. That is when you should start panicking, not when you have to work too much. Firms are going to stay as leanly staffed as they possibly can, so associates are going to be working hard.

Both articles mention the contraction of the biglaw market has been going on longer than the recession and that the business models of biglaw firms are not sustainable - for all but a handful of the best firms--over the long term.

Can things turn around? Who knows? If there is another huge increase in corporate business due to some new kind of bubble, then yes I guess so.

There are also signs pointing in the opposite direction. Outsourcing and e-discovery and shit all represented huge changes in litigation, but there's some push-back now (i.e. things were done cheaply, then went wrong, then there were law suits).

This may be true, but didn't a federal judge recently rule that discovery had to be done electronically in a case? I think there were a massive amount of documents and the judged determined that e-discovery was reliable enough to be used. http://www.natlawreview.com/article/fed ... -discovery
But the plaintiffs are pushing back against that order:
--LinkRemoved--

[Gail]

This may be true, but didn't a federal judge recently rule that discovery had to be done electronically in a case? I think there were a massive amount of documents and the judged determined that e-discovery was reliable enough to be used. http://www.natlawreview.com/article/fed ... -discovery
But the plaintiffs are pushing back against that order:
--LinkRemoved--

Here's what I think might happen with that.

E-discovery will become a fad. It will cause slow hiring for lawyers. At some point, E-discovery is going to mess up. After that point, no one is going to want to use it. The pendulum will swing again.


In the meantime, I think unless you're in the top 14 or are not paying anything for your law degree, it's really worth it to step back and examine where the market is going before it goes there. For the next couple of years at least.

[09042014]

The lack of discovery in-firm is already factored into hiring and revenue if all the juniors I talked to last year were telling the truth. They were all saying they weren't really doing any of it.

And since partners and seniors weren't ever doing doc review, the solution to overstaffing would be to just not hire as many new associates. Which firms have been doing since 2010 til now.

But I think 2013 hiring is just about at "new normal" levels. 2013 was the year smaller firms began hiring again in earnest. The reduced need in litigation because of doc review being outsourced, and in transaction because of entire financial packaging practices being extinct mean there isn't any going back to 2005 hiring levels.

[cloudhidden]

Then what's with the TLS optimism about hiring increasing? I'm starting to take new stories with a grain of salt, otherwise, you would think this dramatically changes how to choose a school. Now, "the recovery was bogus." Ugh what a headache.

[keg411]

The lack of discovery in-firm is already factored into hiring and revenue if all the juniors I talked to last year were telling the truth. They were all saying they weren't really doing any of it.

And since partners and seniors weren't ever doing doc review, the solution to overstaffing would be to just not hire as many new associates. Which firms have been doing since 2010 til now.

But I think 2013 hiring is just about at "new normal" levels. 2013 was the year smaller firms began hiring again in earnest. The reduced need in litigation because of doc review being outsourced, and in transaction because of entire financial packaging practices being extinct mean there isn't any going back to 2005 hiring levels.

I'd pretty much agree with this. And personally, I don't see much wrong with it. The 2005-2007 model was unsustainable.

[rayiner]

The article misses a key distinction, which is that law firms aren't built on financial leverage the way most businesses are. They don't borrow tons of money to fund continued growth. They don't have stock prices that must be propped up by continuous growth. If a particular firm falls behind in growing profits, its partners might jump ship, but that's not going to cause the industry to decline, it'll just move profits from one firm to another.

A decline in big law will be precipitated by a decline in the demand for sophisticated legal services. e-discovery and off-shoring and the like will definitely cut demand, but only so much. And such a drop in demand might lead to structural changes within law firms (lower leverage, lower profits), but can't cause the same sort of death spiral you see in financially leveraged industries.

[cloudhidden]

The lack of discovery in-firm is already factored into hiring and revenue if all the juniors I talked to last year were telling the truth. They were all saying they weren't really doing any of it.

And since partners and seniors weren't ever doing doc review, the solution to overstaffing would be to just not hire as many new associates. Which firms have been doing since 2010 til now.

But I think 2013 hiring is just about at "new normal" levels. 2013 was the year smaller firms began hiring again in earnest. The reduced need in litigation because of doc review being outsourced, and in transaction because of entire financial packaging practices being extinct mean there isn't any going back to 2005 hiring levels.

Didn't see this until after I posted... I agree with keg411, as this seems credible. The 2011 NLJ250 numbers for the worst OCI still indicate 35-50% placement at a T14. I don't think this article points to a worse scenario, just reaffirms to only expect incremental improvement. I can't imagine it getting any worse than 2009.

[Renzo]

The article misses a key distinction, which is that law firms aren't built on financial leverage the way most businesses are. They don't borrow tons of money to fund continued growth. They don't have stock prices that must be propped up by continuous growth. If a particular firm falls behind in growing profits, its partners might jump ship, but that's not going to cause the industry to decline, it'll just move profits from one firm to another.

A decline in big law will be precipitated by a decline in the demand for sophisticated legal services. e-discovery and off-shoring and the like will definitely cut demand, but only so much. And such a drop in demand might lead to structural changes within law firms (lower leverage, lower profits), but can't cause the same sort of death spiral you see in financially leveraged industries.

I disagree. Many firms are in fact heavily financially leveraged, it just doesn't look the same as when firms do. In fact, that's what's bringing down Howrey: they used leverage (bank loans and money borrowed from the partners) to make guaranteed disbursements, which they had to promise lateral rainmakers in order to lure them in. Business didn't materialize the way they though it would thought it would, the partners aren't getting paid, those with business are leaving, and now they are likely triggering debt covenants.

Firms cannot continue to "grow" by overpaying to lure in hostshot lateral partners. It's false growth, and with the exception of a very few "elite" firms, that's the model they all depend on.

[09042014]

The article misses a key distinction, which is that law firms aren't built on financial leverage the way most businesses are. They don't borrow tons of money to fund continued growth. They don't have stock prices that must be propped up by continuous growth. If a particular firm falls behind in growing profits, its partners might jump ship, but that's not going to cause the industry to decline, it'll just move profits from one firm to another.

A decline in big law will be precipitated by a decline in the demand for sophisticated legal services. e-discovery and off-shoring and the like will definitely cut demand, but only so much. And such a drop in demand might lead to structural changes within law firms (lower leverage, lower profits), but can't cause the same sort of death spiral you see in financially leveraged industries.

I disagree. Many firms are in fact heavily financially leveraged, it just doesn't look the same as when firms do. In fact, that's what's bringing down Howrey: they used leverage (bank loans and money borrowed from the partners) to make guaranteed disbursements, which they had to promise lateral rainmakers in order to lure them in. Business didn't materialize the way they though it would thought it would, the partners aren't getting paid, those with business are leaving, and now they are likely triggering debt covenants.

Firms cannot continue to "grow" by overpaying to lure in hostshot lateral partners. It's false growth, and with the exception of a very few "elite" firms, that's the model they all depend on.

But it seems like that kind of fast growth, high leverage isn't really the standard all firms depend on. Is guaranteed disbursements a common thing? I was under the impression they were uncommon.